Documente Academic
Documente Profesional
Documente Cultură
22 7
MACROECONOMICS
chapter:
Below is a simplified circular-flow diagram for the economy of Micronia. (Note that
there is no investment spending in Micronia.)
a. What is the value of GDP in Micronia?
b. What is the value of net exports?
c. What is the value of disposable income?
d. Does the total flow of money out of householdsthe sum of taxes paid and consumer spendingequal the total flow of money into households?
e. How does the government of Micronia finance its purchases of goods and services?
Government purchases of
goods and services = $100
Government
Taxes = $100
Households
Wages,
profit,
interest,
rent = $750
Consumer
spending = $650
Factor
markets
Wages, profit,
interest,
rent = $750
Firms
Exports = $20
Rest of world
Imports = $20
1.
Solution
KrugWellsECPS3e_Macro_CH07.indd S-99
S-99
4/19/12 11:08 AM
S-100
MACROECONOMICS, CHAPTER 7
ECONOMICS, CHAPTER 22
2.
A more complex circular-flow diagram for the economy of Macronia is shown below.
(Note that Macronia has investment spending and financial markets.)
a. What is the value of GDP in Macronia?
b. What is the value of net exports?
c. What is the value of disposable income?
d. Does the total flow of money out of householdsthe sum of taxes paid, consumer
spending, and private savingsequal the total flow of money into households?
e. How does the government finance its spending?
Government purchases of
goods and services = $150
Taxes = $100
Consumer
spending = $510
Factor
markets
Wages, profit,
interest,
rent = $800
Firms
Investment
spending = $110
Exports = $50
Financial
markets
Borrowing and
stock issues by
firms = $110
Foreign borrowing
and sales of stock = $130
Rest of world
Imports = $20
2.
Solution
KrugWellsECPS3e_Macro_CH07.indd S-100
4/19/12 11:08 AM
3.
S-101
The components of GDP in the accompanying table were produced by the Bureau of
Economic Analysis.
Category
Consumer spending
Durable goods
$1,085.5
Nondurable goods
2,301.5
Services
6,858.5
1,728.2
Nonresidential
1,390.1
Structures
Equipment and software
Residential
Change in private inventories
374.4
1,015.7
338.1
66.9
Net exports
Exports
1,839.8
Imports
2,356.7
1,222.8
National defense
819.2
Nondefense
403.6
1,780.0
3.
Solution
KrugWellsECPS3e_Macro_CH07.indd S-101
4/19/12 11:08 AM
S-102
MACROECONOMICS, CHAPTER 7
ECONOMICS, CHAPTER 22
4.
The small economy of Pizzania produces three goods (bread, cheese, and pizza), each
produced by a separate company. The bread and cheese companies produce all the
inputs they need to make bread and cheese, respectively. The pizza company uses the
bread and cheese from the other companies to make its pizzas. All three companies
employ labor to help produce their goods, and the difference between the value of
goods sold and the sum of labor and input costs is the firms profit. The accompanying table summarizes the activities of the three companies when all the bread and
cheese produced are sold to the pizza company as inputs in the production of pizzas.
Bread
company
Cheese
company
Pizza
company
Cost of inputs
$0
$0
$50 (bread)
35 (cheese)
Wages
15
20
75
Value of output
50
35
200
4.
Solution
a. To calculate GDP as the value added in production, we need to sum all value
added (value of output less input costs) for each company. Value added in the
bread company is $50; in the cheese company, $35; and in the pizza company,
$115 ($200 $50 $35). The total value added in production is $200 ($50 +
$35 + $115).
b. To calculate GDP as spending on final goods and services, we only need to estimate the value of pizzas because all bread and cheese produced are intermediate
goods used in the production of pizzas. Spending on final goods and services is
$200.
c. To calculate GDP as factor income, we need to sum factor income (wages and
profits) for each firm. For the bread company, factor income is $50: labor earns
$15 and profit is $35. For the cheese company, factor income is $35: labor earns
$20 and profit is $15. For the pizza company, factor income is $115: labor earns
$75 and profit is $40 ($200 $75 $50 $35). Factor income is $200 ($50 +
$35 + $115).
5.
In the economy of Pizzania (from Problem 4), bread and cheese produced are
sold both to the pizza company for inputs in the production of pizzas and to consumers as final goods. The accompanying table summarizes the activities of the three
companies.
Cost of inputs
Wages
Value of output
Bread
company
Cheese
company
Pizza
company
$0
$0
$50 (bread)
35 (cheese)
25
30
75
100
60
200
KrugWellsECPS3e_Macro_CH07.indd S-102
4/19/12 11:08 AM
S-103
Solution
5.
a. To calculate GDP as the value added in production, we need to sum all value
added (value of output less input costs) for each company. Value added in the
bread company is $100; in the cheese company, $60; and in the pizza company,
$115 ($200 $50 $35). The total value added in production is $100 + $60 +
$115 = $275.
b. To calculate GDP as spending on final goods and services, we need to sum the
value of bread, cheese, and pizzas sold as final goods. GDP equals $275 because
the bread company sells $50 worth as final goods, the cheese company sells $25
worth as final goods, and all $200 worth of pizzas are final goods.
c. To calculate GDP as factor income, we need to sum factor income (labor and
profits) for each firm. For the bread company, factor income is $100: labor earns
$25 and profit is $75. For the cheese company, factor income is $60: labor earns
$30 and profit is $30. For the pizza company, factor income is $115: labor earns
$75 and profit is $40 ($200 $75 $50 $35). As factor income, GDP equals
$275 ($100 + $60 + $115).
6.
Which of the following transactions will be included in GDP for the United States?
a. Coca-Cola builds a new bottling plant in the United States.
b. Delta sells one of its existing airplanes to Korean Air.
c. Ms. Moneybags buys an existing share of Disney stock.
d. A California winery produces a bottle of Chardonnay and sells it to a customer in
Montreal, Canada.
e. An American buys a bottle of French perfume in Paris.
f. A book publisher produces too many copies of a new book; the books dont sell
this year, so the publisher adds the surplus books to inventories.
Solution
6.
KrugWellsECPS3e_Macro_CH07.indd S-103
4/19/12 11:08 AM
S-104
MACROECONOMICS, CHAPTER 7
ECONOMICS, CHAPTER 22
7.
The economy of Britannica produces three goods: computers, DVDs, and pizza. The
accompanying table shows the prices and output of the three goods for the years
2010, 2011, and 2012.
Computers
Year
Price
2010
$900
2011
1,000
2012
1,050
Quantity
DVDs
Pizzas
Price
Quantity
Price
Quantity
$10
100
$15
10.5
12
105
16
12
14
110
17
10
a. What is the percent change in production of each of the goods from 2010 to 2011
and from 2011 to 2012?
b. What is the percent change in prices of each of the goods from 2010 to 2011 and
from 2011 to 2012?
c. Calculate nominal GDP in Britannica for each of the three years. What is the percent change in nominal GDP from 2010 to 2011 and from 2011 to 2012?
d. Calculate real GDP in Britannica using 2010 prices for each of the three years. What
is the percent change in real GDP from 2010 to 2011 and from 2011 to 2012?
7.
Solution
a. From 2010 to 2011, the percent change in the production of computers is 5.0%
(equal to ((10.5 10)/10) 100); of DVDs, 5.0% (equal to ((105 100)/100)
100); and of pizza, 0% (equal to ((2 2)/2) 100). From 2011 to 2012,
the percent change in the production of computers is 14.3% (equal to ((12
10.5)/10.5) 100); of DVDs, 4.8% (equal to ((110 105)/105) 100); and of
pizza, 50.0% (equal to ((3 2)/2) 100).
b. From 2010 to 2011, the percent change in the price of computers is 11.1%
(equal to (($1,000 $900)/$900) 100); of DVDs, 20.0% (equal to
(($12 $10)/$10) 100); and of pizza, 6.7% (equal to (($16 $15)/$15)
100). From 2011 to 2012, the percent change in the price of computers
is 5.0% (equal to (($1,050 $1,000)/$1,000) 100); of DVDs, 16.7%
(equal to (($14 $12)/$12) 100); and of pizza, 6.25% (equal to
(($17 $16)/$16) 100).
c. Nominal GDP for each year is calculated by summing up the value of the three
goods produced in that year:
Year
Nominal GDP
2010
$10,030
2011
11,792
2012
14,191
d. Real GDP in 2010 prices is calculated by summing up the value of the three goods
produced each year using 2010 prices:
KrugWellsECPS3e_Macro_CH07.indd S-104
Year
Real GDP
(2005 dollars)
2010
$10,030
2011
10,530
2012
11,945
4/19/12 11:08 AM
8.
S-105
The accompanying table shows data on nominal GDP (in billions of dollars), real
GDP (in billions of 2005 dollars), and population (in thousands) of the United
States in 1960, 1970, 1980, 1990, 2000, and 2010. The U.S. price level rose consistently over the period 19602010.
Nominal GDP
(billions of
dollars)
Real GDP
(billions of
2005 dollars)
Population
(thousands)
1960
$526.4
$2,828.5
180,760
1970
1,038.5
4,226.3
205,089
1980
2,788.1
5,834.0
227,726
1990
5,800.5
8,027.1
250,181
2000
9,951.5
11,216.4
282,418
2010
14,526.5
13,088.0
310,106
Year
a. Why is real GDP greater than nominal GDP for all years until 2000 and lower for
2010?
b. Calculate the percent change in real GDP from 1960 to 1970, 1970 to 1980, 1980 to
1990, 1990 to 2000, and 2000 to 2010. Which period had the highest growth rate?
c. Calculate real GDP per capita for each of the years in the table.
d. Calculate the percent change in real GDP per capita from 1960 to 1970, 1970
to 1980, 1980 to 1990, 1990 to 2000, and 2000 to 2010. Which period had the
highest growth rate?
e. How do the percent change in real GDP and the percent change in real GDP per
capita compare? Which is larger? Do we expect them to have this relationship?
8.
Solution
a. Real GDP is greater than nominal GDP for all years until 2000 because the base
year is 2005, and from 1960 to 2005, prices rose. So to calculate real GDP for the
years 1960, 1970, 1980, 1990, and 2000, we would multiply output in those years
by the higher prices that existed in 2005. To calculate nominal GDP, we would
multiply output by the lower prices that existed in those particular years. Since
prices rose from 2005 to 2010, valuing the output in 2010 using 2005 prices (real
GDP) will result in a lower number than valuing the output in 2010 using 2010
prices (nominal GDP). By the way, real GDP would equal nominal GDP in 2005
because 2005 is the base year and we use the same set of prices to value both real
and nominal GDP in that year.
b. The accompanying table shows the percent change in real GDP from 1960 to
1970, 1970 to 1980, 1980 to 1990, 1990 to 2000, and 2000 to 2010. The percent
change in real GDP was the highest during the 1960s.
Year
Real GDP
(billions of
2005 dollars)
1960
$2,828.5
1970
4,266.3
50.8%
1980
5,834.0
36.7%
1990
8,027.1
37.6%
2000
11,216.4
39.7%
2010
13,088.0
16.7%
KrugWellsECPS3e_Macro_CH07.indd S-105
Percent
change in
real GDP
4/19/12 11:08 AM
S-106
MACROECONOMICS, CHAPTER 7
ECONOMICS, CHAPTER 22
c.
1960
$15,648
1970
20,607
1980
25,619
1990
32,085
2000
39,716
2010
42,205
d. The years from 1960 through 1970 had the highest growth rate, as shown in the table.
Percent change in real GDP per capita
19601970
31.7%
19701980
24.3%
19801990
25.2%
19902000
23.8%
20002010
6.3%
e. For a given time period, the percent change in real GDP is consistently larger than
the percent change in real GDP per capita. We should expect this pattern because
the U.S. population was growing from 1960 to 2010.
9.
Eastland College is concerned about the rising price of textbooks that students must
purchase. To better identify the increase in the price of textbooks, the dean asks you,
the Economics Departments star student, to create an index of textbook prices. The
average student purchases three English, two math, and four economics textbooks
per year. The prices of these books are given in the accompanying table.
2010
2011
2012
$50
$55
$57
Math textbook
70
72
74
Economics textbook
80
90
100
English textbook
a. What is the percent change in the price of an English textbook from 2010 to 2012?
b. What is the percent change in the price of a math textbook from 2010 to 2012?
c. What is the percent change in the price of an economics textbook from 2010 to 2012?
d. Using 2010 as a base year, create a price index for these books for all years.
e. What is the percent change in the price index from 2010 to 2012?
Solution
9.
a. The percent change in the price of an English textbook from 2010 to 2012 is
14.0% (equal to (($57 $50)/$50) 100).
b. The percent change in the price of a math textbook from 2010 to 2012 is 5.7%
(equal to (($74 $70)/$70) 100).
c. The percent change in the price of an economics textbook from 2010 to 2012 is
25% (equal to (($100 $80)/$80) 100).
d. To create an index of textbook prices, you must first calculate the cost of the market basket (three English, two math, and four economics textbooks) in each of the
three years; then normalize it by dividing the cost of the market basket in a given
year by the cost of the market basket in the base period; and then multiply by 100
to get an index value (base period of 2010 = 100).
KrugWellsECPS3e_Macro_CH07.indd S-106
4/19/12 11:08 AM
S-107
10.
The consumer price index, or CPI, measures the cost of living for a typical urban household by multiplying the price for each category of expenditure (housing, food, and so
on) times a measure of the importance of that expenditure in the average consumers
market basket and summing over all categories. However, using data from the consumer
price index, we can see that changes in the cost of living for different types of consumers can vary a great deal. Lets compare the cost of living for a hypothetical retired person and a hypothetical college student. Lets assume that the market basket of a retired
person is allocated in the following way: 10% on housing, 15% on food, 5% on transportation, 60% on medical care, 0% on education, and 10% on recreation. The college
students market basket is allocated as follows: 5% on housing, 15% on food, 20% on
transportation, 0% on medical care, 40% on education, and 20% on recreation. The
accompanying table shows the July 2011 CPI for each of the relevant categories.
CPI
November 2007
Housing
220.2
Food
228.3
Transportation
216.2
Medical care
400.3
Education
206.2
Recreation
113.5
Calculate the overall CPI for the retired person and for the college student by multiplying the CPI for each of the categories by the relative importance of that category
to the individual and then summing each of the categories. The CPI for all items in
July 2011 was 225.9. How do your calculations for a CPI for the retired person and
the college student compare to the overall CPI?
Solution
10.
Weight
CPI
July 2011
Housing
0.1
220.2
22.02
Food
0.15
228.3
34.245
Transportation
0.05
216.2
10.81
Medical care
0.6
400.3
240.18
Education
206.2
Recreation
0.1
113.5
Overall CPI
KrugWellsECPS3e_Macro_CH07.indd S-107
CPI
Contribution
0
11.35
318.605
4/19/12 11:08 AM
S-108
MACROECONOMICS, CHAPTER 7
ECONOMICS, CHAPTER 22
Weight
CPI
November 2011
CPI
Contribution
0.05
220.2
11.01
Housing
Food
0.15
228.3
34.245
Transportation
0.2
216.2
43.24
Medical care
400.3
Education
0.4
206.2
Recreation
0.2
113.5
0
82.48
22.7
Overall CPI
193.675
To calculate the CPI for the retired person and for the college student, we need to weight
the CPI for each component with the importance of that component in his or her market
basket. The CPI for the retired person is 318.605 and for the college student is 193.675.
Since the CPI for the average consumer was 225.9, the CPI will overstate the increase in
the cost of living for the college student and understates it for the retired person.
11.
Each month the Bureau of Labor Statistics releases the Consumer Price Index Summary
for the previous month. Go to The Bureau of Labor Statistics home page at www.
bls.gov. Place the cursor over the Economic Releases tab and then click on Major
Economic Indicators in the drop-down menu that appears. Once on the Major
Economic Indicators page, click on Consumer Price Index. Use the not seasonally
adjusted figures. On that page, under Table of Contents, click on Consumer Price
Index Summary. What was the CPI for the previous month? How did it change from
the previous month? How does the CPI compare to the same month one year ago?
11.
Solution
Answers will vary with the latest data. For July 2011, the (not seasonally adjusted) CPI
was 225.922; it rose 0.5% from June 2011. The CPI was 3.6% higher than in July 2010.
12.
The accompanying table provides the annual real GDP (in billions of 2005 dollars)
and nominal GDP (in billions of dollars) for the United States.
2006
2007
2008
2009
2010
Real GDP
(billions of
2005 dollars) 12,958.5 13,206.4 13,161.9 12,703.1 13,088.0
Nominal GDP
(billions of
dollars)
13,377.2 14,028.7 14,291.5 13,939.0 14,526.5
Solution
12.
a. The GDP deflator in a given year is 100 times the ratio of nominal GDP to real
GDP, yielding the figures in the accompanying table.
2006
2007
2008
2009
2010
Real GDP
(billions of 2005 dollars)
12,958.5
13,206.4
13,161.9
12,703.1
13,088.0
Nominal GDP
(billions of dollars)
13,377.2
14,028.7
14,291.5
13,939.0
14,526.5
103.2
106.2
108.6
109.7
111.0
GDP deflator
KrugWellsECPS3e_Macro_CH07.indd S-108
4/19/12 11:08 AM
S-109
b. The inflation rate obtained by using the GDP deflator is calculated using the formula ((current GDP deflator GDP deflator in the previous year)/(GDP deflator
in the previous year)) 100, yielding the figures in the accompanying table.
GDP deflator
2006
2007
2008
2009
2010
103.2
106.2
108.6
109.7
111.0
Inflation
13.
2.9%
2.2%
1.1%
1.2%
The accompanying table contains two price indexes for the years 2008, 2009, and
2010: the GDP deflator and the CPI. For each price index, calculate the inflation rate
from 2008 to 2009 and from 2009 to 2010.
Year
GDP
deflator
CPI
2008
108.582
215.303
2009
109.729
214.537
2010
110.992
218.056
Solution
13.
The accompanying table calculates the inflation rates based on the GDP deflator and
on the CPI.
14.
Year
GDP
deflator
2008
108.582
Inflation rate
(based on
GDP deflator)
Inflation rate
(based on CPI)
CPI
215.303
2009
109.729
1.1%
214.537
0.4%
2010
110.992
1.2%
218.056
1.6%
The cost of a college education in the United States is rising at a rate faster than
inflation. The table below shows the average cost of a college education in the United
States during the academic year that began in 2009 and the academic year that began
in 2010 for public and private colleges. Assume the costs listed in the table are the
only costs experienced by the various college students in a single year.
Cost of college education during academic year beginning 2009
(averages in 2009 dollars)
Tuition
and fees
Room
and board
Books
and supplies
Transportation
Other expenses
$2,544
$7,202
$1,098
$1,445
$1,996
7,020
8,193
1,122
1,079
1,974
18,548
8,193
1,122
1,079
1,974
26,273
9,363
1,116
849
1,427
Tuition
and fees
Room
and board
Books
and supplies
Transportation
Other expenses
$2,713
$7,259
$1,133
$1,491
$2,041
7,605
8,535
1,137
1,073
1,989
19,595
8,535
1,137
1,073
1,989
27,293
9,700
1,181
862
1,440
KrugWellsECPS3e_Macro_CH07.indd S-109
4/19/12 11:08 AM
S-110
MACROECONOMICS, CHAPTER 7
ECONOMICS, CHAPTER 22
a. Calculate the cost of living for an average college student in each category for
2009 and 2010.
b. Calculate an inflation rate for each type of college student between 2009 and
2010.
14.
Solution
a. To calculate the cost of living, we add all the costs in each category. The cost of
living for each type of student is calculated in the accompanying table.
Average cost of attendance in dollars
2009
2010
$14,285
$14,637
19,388
20,339
30,916
32,329
39,028
40,476
b. The inflation rate for each type of student is calculated as follows: ((price index
in 2010 price index in 2009)/(price index in 2009)) 100. Because each type
of student consumes the same goods and services in 2009 and 2010, the cost of
living can be used as a price index. Using the formula, the inflation rates are calculated in the following table.
Inflation rate
KrugWellsECPS3e_Macro_CH07.indd S-110
2.5%
4.9%
4.6%
3.7%
4/19/12 11:08 AM